Craig's Corner - Optionality Wins

Craig Robson, Founding Principal and Managing Director

In May, when our youngest son was finishing school exams, my wife and I encouraged him to start thinking about what he would want out of a summer job. He initially suggested a few options to us that we, as his parents, felt were narrow and somewhat one-dimensional, acknowledging that as a 14-year-old his employment choices were limited. We encouraged him to think broader and suggested he try to identify a job which would create optionality for him. He was somewhat confused so we continued the discussion by giving him some examples which might be beneficial to him such as (teenager verbiage in parentheses): fixed, variable and tax efficient pay (minimum wage plus cash tips), client-facing opportunities (talking to the customer), flexible hours (he could sleep in some mornings), employment progression (seeing the logical path to the next job), and his commute to work (proximity to our home, so he could ride his bike). After a few weeks he decided to apply to work at a local Italian restaurant, where our family often dines, because it would check most of those boxes. Upon interviewing, he was offered a job as a busboy/table setter/bread and water server, which he gratefully accepted.

In my professional view, appropriately identifying and then implementing optionality and choices from an investment perspective is always beneficial and has been reinforced this year, as demonstrated by two observations:

  • During the first two quarters of 2022, the S&P 500 dropped 20%+ and this has only happened eight times since WWII.1

  • The bond market, which for only the 2nd time since 1976, dropped greater than 10% in the first 6 months.2

Identifying investment solutions which don't positively correlate or react the same to each other has become somewhat more difficult over the past decade. Yet, there are still solutions which hit the mark. Adding some combination of private equity/credit/real estate as well as commodities to a traditional 60/40 portfolio (60 % public equities/40% public bonds) historically has provided non-correlative benefits which may compress the volatility in one's individual portfolio. Why is this so important? Unfortunately, there is no bat phone we can call that will tell us exactly when we should sell out of the markets and buy back in. Yet, by creating a portfolio with various investment solutions which commensurate with your investment objective, risk tolerance, time horizon, and liquidity criteria provides a much-needed shock absorber when volatility arises. This dampening effect helps counterbalance the initial reaction most investors feel when portfolio turbulence comes about, which may in turn, reduce the need to overreact and make emotional decisions which historically do not provide positive outcomes.

It's now July and during a recent conversation with my youngest son he unexpectedly mentioned that he and his friends were talking (as a parent you never know where this may lead!) and all his friends agree that he has the best summer job. I asked him why they believe that, and he stated they all feel his job provides the most options compared with theirs - bingo!

I'll close out this latest Craig's Corner with a quote from Garry Kasparov, the famous chess grandmaster and former World Chess Champion who created options and choices for himself while playing chess throughout his illustrious career. "The stock market and the gridiron and the battlefield aren’t as tidy as the chessboard, but in all of them, a single, simple rule holds true: make good decisions and you’ll succeed; make bad ones and you’ll fail."

Craig Robson

Founding Principal and Managing Director

[1] Bespoke Investment Group, Bespoke Report, July 1, 2022

[2] Bespoke Investment Group, The Closer, June 30, 2022